Macroeconomic Cash Reserve Ratio

Only available on StudyMode
  • Download(s) : 79
  • Published : April 17, 2013
Open Document
Text Preview
mrunal.org

http://mrunal.org/2012/08/econ-crr.html

[Economy] Cash Reserve Ratio (CRR) Controversy between SBI & RBI: meaning, implication on Economy Explained 1. What is CRR? 2. What is Scheduled Commercial Bank? 3. Examples of Scheduled Commercial Banks 1. Case # 1: High CRR and SLR 2. Case # 2: Low CRR and SLR 4. Repo Rate 5. Reverse Repo Rate 6. Bank Rate 7. What is the need of all these CRR,SLR,Repo rates? 8. What is the problem with CRR? 9. How much CRR deposit does RBI have? 10. What does SBI want? 11. Deputy Governor of RBI 12. Timeline of Events 13. Mock Questions Before proceeding further, do read the earlier articles on 1. Statutory Liquidity Ratio (SLR) 2. Cost Push Inflation 3. Demand Pull Inflation

What is CRR?
CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their total deposits with RBI in cash form. Right now, CRR is about 4.75% that means if people deposit total Rs.100 in SBI, then SBI would have to deposit Rs.4.75 in RBI. This is CRR or Cash Reserve Ratio. CRR rule doesnot apply to Regional Rural Banks, Non Banking Financial Companies (NBFC), Mutual funds or insurance companies.

What is Scheduled Commercial Bank?
Scheduled banks are those banks which have been included in the second schedule of

the Reserve bank of India act of 1934. The banks included in this schedule list should fulfill two conditions. 1. The paid capital and collected funds of bank should not be less t han Rs. 5 lakhs. 2. Any activity of the bank will not adversely affect the interests of depositors [hahaha, does it mean Non-scheduled banks are allowed to adversely affect the interests of depositors !?]

Examples of Scheduled Commercial Banks
Public Sector Majority of stake is held by the government. 1. State Bank of India (SBI) 2. Punjab National bank (PNB) Private Sector Majority stakes are held by private players. 1. ICICI, 2. HDFC, 3. AXIS Bank

Case #1: High CRR and SLR
Suppose total deposit deposited in (by you and me) State Bank of India =Rs.100 Total Deposit CRR: 15%SBI has to park this much amount of total deposit in RBI, without getting any interest. SLR: 38%SBI has to park this much amount of total deposit, in Government securities / treasury bonds. SBI earns around 7.5% interest rate on this investment.click me for more on SLR Money left with SBI Rs.100 -15

-38

100-1538=Rs.47

Case #2: Low CRR and SLR
Total Deposit CRR: 4.75%SBI has to park this much amount of total deposit in RBI, without getting any interest. Rs.100 -4.75

SLR: 23%SBI has to park this much amount of total deposit, in Government securities / treasury bonds. SBI earns around 7.5% interest rate on this investment. Money left with SBI

-23

100-4.7523=Rs.72.25

In either case, as long as you’re running a bank, you’ll have some input costs such as 1. Salary to Bank PO , Clerks, peons and security guards (With rusted guns) 2. Office rent 3. ATM machine’s electricity and maintenance. 4. Newspaper advertizements. To pay above salary and bills, SBI would need to maintain certain amount of profit margin, no matter what RBI does with CRR,SLR or Repo Rate. In Case# 1, when SBI has only Rs.47 in the hands, what can it do to keep the profit margin same? Obviously SBI will have to increase the interest rates on car,home,bike,business loans given to customers. In case# 2, when SBI has Rs.72, what can it do? Here the situation is not that bad. So, SBI chief would decrease the interest rates on car,home,bike,business loans to seduce more customers. We already discussed this- SBI has more money so it can cut down interest rates and suffer temporary reduction in profit, in order to seduce more customers (compared to ICICI) So once SBI has reduced the interest rates, other banks will need to reduce their interest rates, to stay in the competition.

Repo Rate
Let’s continue assuming the Case# 2, that SBI has only Rs.72.25 left in its locker. SBI chief comes to know that recently Samsung Company...
tracking img